Free Trade End Game in Seoul

Washington’s demand for further talks on the draft of the Korea-US free trade agreement was the last thing on Seoul’s mind when the tough 10-month negotiations ended last April in a deal that turned out to be surprisingly popular in South Korea despite demonstrations by South Korean farmers who see the pact as a threat to their traditional livelihood.

Signs for passage of the landmark deal in Seoul are good so far. An effort by the giant Metal Workers Union to stage a general strike to protest the deal this week seem to be fizzling out, with barely 12 percent of the union’s members joining the action on Monday. Workers at the union’s largest affiliate, which represents the huge Hyundai car company, have scaled back their participation to a token effort, perhaps in recognition of the fact that the deal will likely allow the company to sell even more Hyundais in the US, which is not a bad thing for the well-paid workers.

But the fine print is still not done and unfortunately for Seoul the US Congress, now under Democrats, wanted to strengthen labor and environmental provisions under a new “guideline” it was issuing for all future trade pacts. The White House had little choice but to go along when the new guidelines were agreed in May, after this deal was supposedly wrapped up. With much of President Roh Moo-hyun’s prestige riding on the agreement, South Korea glumly accepted the need to renegotiate on some labor and environmental provisions over two days of talks last week.

Even so, neither side is saying if the final draft will be ready for submission to Congress for approval by June 30, the deadline set for fast-track authority given to President George W. Bush to expire. More talks are due this week, according to Yonhap news agency. The uncertainty is causing considerable anxiety in both Seoul and Washington because failure to submit the draft in time could raise the politically horrendous possibility of aborting this all-important agreement.

As it stands, it is the most important bilateral trade accord for the US in the 15 years since the conclusion of the North American Free Trade Agreement between the US, Canada and Mexico. This FTA with South Korea could add as much as US$20 billion to what was already a staggering US$79 billion in bilateral trade volume in 2006.

The chief US negotiator, Wendy Cutler, asked for a further consultation in May when the Democrat-controlled Congress demanded inclusion of the new labor and environmental provisions, with a stringent clause for penalties in the event either side failed to pass the standards. Under the clause, no labor or environmental standards set in the accord should be compromised to the extent of undercutting prices.

Given the strong domestic labor unions and increasingly strict environmental requirements imposed on South Korea’s manufacturing sector, Roh administration officials see no salient obstacles to the new standards. What is worrisome, though, is the penalty of up to US$15 million stipulated in the US draft, which Seoul regards as a thinly disguised attempt by the US to hit Korean exports. In Seoul’s eyes, the US draft makes it too “simple” to use this clause against them.

But on the whole, they are relieved that these new talks do not necessarily involve renegotiations of other key provisions. A number of powerful US senators, including Democrat presidential hopeful Hillary Clinton, have vowed to oppose the draft, taking particular issue over Korea’s huge trade imbalance on autos.

US heartland senators, particularly Max Baucus of Montana, have demanded that Seoul completely open its beef market, which was closed over the mad cow disease scare in 2003. While beef is not a subject of the FTA, per se, the health issue has largely gone away and Seoul has said it will begin accepting beef imports, a prospect that has already led to sharp drops in beef prices by domestic producers who may soon lose the protected market that has made Korean beef among the most expensive in the world.

The current draft knocks out duties from about 95 percent of consumer and industrial goods traded between the two countries. Restrictions on the auto sector have been considerably eased, which could lead to Hyundai’s cozy domestic market lead facing a future shake up as well.

Finishing up last week’s talks in Seoul, Cutler emphasized that the sit-down “would in no way alter the balance we achieved with the FTA” in April.

But Roh remains vulnerable to any new elements that are seen as giving the US an advantage. While the union and farm lobbies – whose power remains considerable, if weakening on this issue – are fired up to resist the bill in the National Assembly, they clearly do not have the numbers to thwart passage since both opposition conservatives and moderate liberals aligned with Roh are largely in favor of the deal. Further, throughout the FTA process, predictions of turmoil in the streets have largely failed to materialize as farmers and others have been unable to gain the critical mass needed to force a crisis over the FTA.

Roh is increasingly aware that his legacy is riding on its passage, and he doesn’t want anything to go wrong now. An opinion poll taken right after the talks ended in April gave him a 10 percentage point bump in his approval rating, to 32.2 percent. The draft itself has won a whopping 61 percent public approval as Korea’s consumers seem to understand the pact will lower prices on a wide range of products.

The president has been widely criticized for foot-dragging on economic reforms and his generosity to North Korea, among other issues. Set to retire in February, he is banned by the constitution from seeking a second term, but he would still like to use what clout and political savvy he has to thwart the conservative Grand National Party from gaining power in the December presidential election. Passage of the FTA would be a grand achievement on which to end his troubled tenure.